Wrapped Bitcoin in Austria: Is Converting BTC to WBTC Tax-Neutral?

Wrapped Bitcoin in Austria: Is Converting BTC to WBTC Tax-Neutral?

Converting Bitcoin into Wrapped Bitcoin (WBTC) does not necessarily amount, in economic terms, to selling Bitcoin for euros. What the investor receives instead is a token designed to represent the value of Bitcoin on other blockchain networks. According to the project, each WBTC is backed 1:1 by Bitcoin.

For investors in Austria this raises an important tax question: is the move from BTC to WBTC a tax-neutral crypto-to-crypto swap – or are the Bitcoin gains accrued up to that point already taxed at 27.5 percent?

There appears to be no explicit statement from the Austrian Ministry of Finance (BMF) dealing specifically with Wrapped Bitcoin. Under the general rules, however, the transaction can be tax-neutral provided that both BTC and WBTC qualify as cryptocurrencies within the meaning of section 27b(4) of the Austrian Income Tax Act (EStG).

Crypto for Crypto Is Generally Tax-Neutral in Austria

Austrian crypto tax law contains one important exception: swapping one cryptocurrency for another is generally not treated as a taxable realisation.

No tax therefore arises at the moment of the swap as a rule. Instead, the original acquisition costs carry over to the cryptocurrency received.

An example:

• Bitcoin originally bought for 20,000 euros
• Bitcoin worth 60,000 euros at the time of the move to WBTC
• Investor receives WBTC worth 60,000 euros

If the transaction qualifies as a crypto-to-crypto swap for tax purposes, the 40,000 euros of appreciation are not taxed immediately.

The acquisition costs of the WBTC generally remain 20,000 euros afterwards. If the WBTC holding is later sold for euros at, say, 70,000 euros, the taxable gain is generally 50,000 euros.

The tax is therefore not cancelled. It is deferred to a later taxable realisation.

What Matters Is How WBTC Is Classified for Tax Purposes

This is precisely where the uncertainty lies.

The BMF states explicitly that tax neutrality applies only where both the cryptocurrency given up and the one received meet the requirements of section 27b(4) EStG.

In technical terms, there is a good deal to suggest that WBTC qualifies as a crypto-asset. The token can be transferred and traded electronically, and it represents Bitcoin on other blockchain networks. According to the WBTC project, every WBTC is backed by one Bitcoin held in custody. In the minting process, BTC is transferred to a custodian and a corresponding amount of WBTC is issued; on redemption, WBTC is destroyed and BTC is released again.

That does not automatically mean the Austrian BMF has already confirmed WBTC as a cryptocurrency under section 27b.

For larger amounts, the specific tax classification should therefore be examined.

Direct Wrapping Can Also Be Treated as a Swap

WBTC can either be bought on an exchange or created through the wrapping process itself.

In classic minting, the user places Bitcoin into the designated custody structure and receives WBTC in return. Technically, then, the same Bitcoin is not simply made visible on another blockchain. BTC is held in custody and separate WBTC tokens are issued.

For tax purposes, this argues for viewing the transaction as an exchange of two assets.

For comparable transactions such as token merges, the BMF has stated that replacing one cryptocurrency with another can generally be treated as a swap. For new assets, such a transaction remains tax-neutral provided both tokens are cryptocurrencies within the meaning of section 27b(4) EStG.

A plausible tax analogy can be drawn from this for BTC to WBTC. It is not, however, a specific official ruling on WBTC.

What Happens When WBTC Is Sold Later?

If the original BTC-to-WBTC swap is tax-neutral, the acquisition costs travel with it.

An example:

BTC acquisition: 15,000 euros
Value at the time of wrapping: 50,000 euros
WBTC acquisition costs after the swap: still 15,000 euros
Later WBTC sale: 65,000 euros

The taxable gain is generally:

65,000 − 15,000 = 50,000 euros

Taxable new crypto assets in Austria are generally subject to the special tax rate of 27.5 percent.

Converting WBTC Back Into Bitcoin

The reverse direction can be tax-neutral on the same principle. In the official redemption process, WBTC is burned and the corresponding BTC is released from custody.

Where WBTC is classified as a cryptocurrency for tax purposes, this can again constitute a crypto-to-crypto swap in principle. The acquisition costs would carry over to the Bitcoin received back. An immediate gain then generally arises only on a later taxable event – the sale of the Bitcoin for euros, for instance.

Take Care With Legacy Bitcoin Holdings

The distinction between legacy assets and new assets is particularly important.

Bitcoin acquired after 28 February 2021 generally falls under the current Austrian crypto tax regime.

For Bitcoin acquired before 1 March 2021, special transitional rules apply instead.

For comparable token swap transactions the BMF has clarified the position: where legacy assets are swapped for another cryptocurrency, this generally constitutes a disposal of the old token and an acquisition of the new one. If the former speculative holding period has already expired, the unrealised gains on the legacy holding can remain tax-free. The newly received token then counts as a new asset.

For an old Bitcoin holding, a move to WBTC can therefore mark an important dividing line for tax purposes.

Using DeFi Can Create Further Taxable Events

Many investors switch to WBTC precisely so they can put their Bitcoin to work in DeFi applications.

Wrapping itself, however, is only the first step. Additional taxable events can arise afterwards, for example where WBTC is:

• lent out,
• contributed to lending pools,
• used for liquidity mining,
• swapped for other tokens,

used as consideration for other assets.

The BMF treats payments for making cryptocurrencies available as ongoing crypto income, for instance. A BTC-to-WBTC swap that is tax-neutral at the outset therefore does not mean that the DeFi use which follows remains tax-neutral as well.

Documentation Matters More Than Usual

Anyone converting BTC into WBTC should record at least the following:

• original acquisition date of the Bitcoin,
• original acquisition costs,
• quantity of BTC used,
• quantity of WBTC received,
• time of the wrapping,
• market value at the time of the swap,
• wallet addresses and transaction IDs,
• any fees paid,
• later redemption or sale of the WBTC.

In a tax-neutral swap, the acquisition costs may not simply be stepped up to the current market value of the WBTC.

Conclusion

Moving from Bitcoin to Wrapped Bitcoin can be tax-neutral in Austria in principle, provided WBTC qualifies as a cryptocurrency within the meaning of section 27b(4) EStG.

The Austrian crypto-to-crypto rule then applies: the Bitcoin gain accrued so far is not realised on the move, and the acquisition costs carry over to the WBTC.

An explicit BMF position specifically on WBTC is not currently apparent. For that very reason, it should not be claimed across the board that every BTC-to-WBTC transaction is automatically tax-neutral. What decides the outcome is the tax qualification of the token and the specific technical and legal structure of the transaction.

The question deserves particular attention for legacy Bitcoin holdings and where lending, liquidity or other DeFi use follows.